FASB Allows Alternatives for Companies Expensing Options; Moves of Requiring Quarterly Footnote Disclosure for Those Not Expensing

The Financial Standards Accounting Board (FASB) has announced it will allow companies who voluntarily choose to expense options to use any of three approaches to starting the practice:

1. To recognize costs only for awards granted after the beginning of the fiscal year in which the change is announced.
2. To recognize costs for new awards plus and unvested outstanding awards.
3. To recognize costs for the year of the change and all prior years had Statement 123 been in effect as of its effective date (going back to 1995, in other words).

Companies might choose the first method because it minimizes the current cost. However, this approach would mean that in the second and subsequent years, the costs would cascade. That's because the portion of vested options in the first year will be relatively small; in the second year there will be new grants plus old grants that vest. This would increase for another two or three years in most companies before reaching equilibrium. So some companies will prefer to take the entire hit now for unvested options. Companies might choose the third method if their costs are small and they want to make a public relations statement.

At the same time, FASB announced that it will issue an exposure draft requiring companies that do not expense options to record the cost using FAS 123 in their footnotes on a quarterly basis, not annually, as currently allowed.